Since the start of the pandemic how to maintain efficient flows of goods around the world has been a hot topic. Nearly 3 years after the start of all the chaos, what are some of the trends in supply chain and logistics which are now impacting trade around the globe?
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Brief Overview of How Supply Chain and Operations Management Developed
OK, so I’m not a supply chain historian so this is just from my very personal perspective…
For decades up until the late 70s, vertical integration was the name of the game. Companies would try to own the whole process. Eg a car manufacturer would own producers of all of the component parts, and might also go back further in the supply chain to own the component suppliers…& suppliers of the component suppliers (you get the idea – in theory that could go back to the mines bringing out the ore). A bread manufacturer might own cereal mills and even farms.
That still exists to a certain extent today (after all it has advantages in terms of controlling the quality and knowing all the pricing) however in really complicated cases, companies started to divest their “non-core” business and to outsource during the 80s. In the mid 90s, the group I was working for included a company which had been sold off by one of the major automotive manufacturers.
Global Supply Chain
Companies looked for cheaper locations for their productions (& often ways to get around increasingly complicated and costly regulations at home, but that’s another story) and started to move across continents.
With this more horizontal supply chain (ie companies who are my partners rather than daughter companies) came the need for structuring HOW to manage everything in the most effective and cost-efficient way. The supply chain management team has to make sure that the right amount of raw materials are available in the right place and in the required quality at the right point in time. Going forward towards the client, then of course the right products also have to be delivered in the right quantity and quality at the time needed.
Covid highlighted the vulnerability of our globalised supply chains
As countries went into lockdown at different times in 2020 it became crystal clear that relying on a single supplier on the opposite side of the world to keep your production running, might be the cheapest solution, but it’s also risky. Same thing with only carrying enough stock for a couple of days and having all your deliveries JIT (“just in time”) – when ports delay loadings as their staff are in lockdown, you can be in a really bad place, even without having a virus problem in your country.
Not to mention the fact that with ports grinding to a standstill, and passenger air traffic coming to a halt, freight prices started to spiral upwards.
Finally in the second half of 2022, freight rates are finally coming back down again. That doesn’t necessarily mean that the problems have been solved in lots of cases though, as for example Ningbo port has gone into lockdown this week. That’s pretty critical on the run up to Double 11.
Also, with world freight rates being quoted in US$ the impact of the rate reductions of the global supply chain is reduced due to the present weakness of both the euro and sterling.
This is also being called friendshoring by some sources.
I’m seeing a lot of that between for US companies who are moving production, for example, back to Mexico. It’s not a move that can be made overnight, but it certainly has it’s advantages:
- the timezone is much closer, (or even the same) to that of the head office
- the culture is closer to their own. I’d argue that there are pretty big cultural differences still, but perhaps they are smaller than between the US and China.
- It’s easier for companies to do business because there’s not this huge difference in the culture
- it’s a shorter transport route. That doesn’t only save time & money on freight, it makes it easier for people to just pop in and out to visit.
You can’t ignore the challenges of physical logistics. Over the centuries many wars (or military campaigns) have failed due to the failure of supply lines (anyone who invaded Russia in the past 300 years could explain that in detail as Napoleon and Hitler both struggled). Wellington also recognised that without excellent logistics then campaigns further from bases were at risk as “the army marches on their stomach”.
Just because we are now in more modern times and talking about business rather than military applications doesn’t change the fact that if your supply lines stretch around the world, then it takes time (& therefore money) to get your products where they need to be and this reduces the cost benefits of labour arbitrage
- in the case of US-Mexico (rather than a US company having a production in China) then it also reduces the political pressure & risk of doing business in China
Within the European area, I’m also seen that happening as well, especially in industries like textiles that can be moved back to, for example, Turkey, Poland, or Romania.
Frequent Supply Chain Errors that also Affect Nearshoring
In the past there may have been an overfocus on labour arbitrage – so companies took cost savings as their highest priority and moved to where labour at the time was cheapest, ignoring the fact that this left them vulnerable. Offshoring the whole production might be cheaper, but of course you then have to factor in the expense of quality control and also the stock management process when your supplier is on the opposite side of the world, weeks or even months away by ship.
Also, don’t underestimate the challenges that differences bring. These differences could be language, culture, legal or fiscal in nature… Even if you outsource your production to a neighbouring country eg from Singapore to Vietnam you have these issues
One of the other trends in supply chain and logistics, is this idea of China plus one; not pulling completely out of out of China, but adding an additional manufacturing location. So having a second or maybe second and third option in a country such as Vietnam or Indonesia. We’re seeing companies such as Apple setting up additional facilities outside of China in order to diversify their risks.
This in turn means that the manufacturing base in Asia is starting to diversify quite a lot as companies are moving out of China a little bit more. Partly because of pandemic issues (ongoing zero Covid policies making it impossible for regular short trips in and out), & partly because of geopolitical issues with the US. US companies are certainly being encouraged to move out of China and have a second option.
Of course, not every not every business can move out of China and realistically speaking, there’s not always a good reason to move out of China. For lots of industries, China is still the place that has a lot of skill, a lot of labour. It’s not the cheapest place anymore to be, but it’s still a great manufacturing location, aside from the fact that it’s almost impossible to visit at the moment. So what I think is also interesting is the fact that people are at least starting to think about what options there are and where they could diversify into.
Effects of the Ukraine-Russia War
The third huge supply chain issue that, of course has come up in this year. has been this question of the Ukraine – Russian war. This is leading to:
- shortages with food supply
- shortages with raw materials & components
- changes in demand are pushing changes in prices, of course.
We’re starting to see food insecurities and debt issues come up. And that is being strengthened in developing markets where potentially there was already an underlying level of insecurity.
On the other hand, it’s a question of inflation being fueled so strongly, especially especially in Europe (including UK), and especially in the in the light of the currency weakness at the moment. There’s also that question of whether this will lead to increased political instability over the winter (the UK already has their own problems), and whether that in turn will lead to social unrest.
A lot of people in the general public, whilst they were all in favour of having sanctions against Russia, as the aggressor, they didn’t necessarily, I think, fully realise what kind of impact that would actually have on their day to day lives. Because for lots of sanctions that have been implemented in the past, (for example, sanctions against Iran), most people don’t notice in day to day life that there’s anything going on there. So that kind of instability could be something that increases over the coming months.
Just in Case Logistics
Probably one of the strongest trends in supply chain and logistics that I’m seeing is this move away from having the ultimately finely tuned lean machine. We saw at the start of the pandemic that the logistics systems which were built 100% on the just in time premise, would have been thrown by having a grain of sand thrown into them (never mind the sandstorm that came!).
Hence just in case logistics where people are trying to ensure that they have alternatives in place for the event that not everything goes according to plan.
Maybe they’re trying to set up a second manufacturing plant, maybe they’re thinking about having an alternative freight route or additional service provider. Maybe they’re thinking about revising all of their last mile logistics or considering automating parts of their picking process. Some have increased their stock levels to be on the safe side.
For sure, many companies are looking at ways that they can avoid a repeat of the chaos that occurred at the start of the pandemic and which has been compounded by events after that time. However, stock, security and peace of mind don’t come cheap so not easy to decide upon at a time when many countries are tipping into recession and cash is tight. Still, just in case logistics offers a safety net.
Digitalisation of Supply Chains 2022
AI, automation, digitalisation…this are all trends in global supply chain management in the present day.
Whether it be in terms of opportunities or threats, the pace of digitalisation of supply chains is unlikely to slow down in the next years. Warehouse automation, tracking of shipments both large and small, drones or unmanned electric vehicles for last mile logistics…all trends that have been vastly accelerated by the pandemic.
With exponentially higher amounts of data being exchanged and more devices & machines than ever being interconnected the risk of security issues also increases, as well as the costs which companies need to consider in order to prevent data breaches.
Ecommerce of course relies on digitalisation in order to be successful and progress here will be key for many companies to secure their supply chains for the future.
Trends in Supply Chain and Logistics impact our daily lives
If there’s one lesson that the pandemic taught supply chain specialists it’s that overdependence in any areas creates vulnerability. However turning totally inwards isn’t the way forward and trade needs to reflect shared values whilst creating opportunities. To do that successfully, we need to be able to strengthen trust and commercial ties in order to gain increased social stability and economic growth. Without digitalisation those aims can’t be reached and we can’t continue to supply all the goods that consumers have come to expect at any time.
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